Interactive Investor

How to trade platinum and palladium

16th December 2011 10:47

Nick Louth from interactive investor


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While gold has been soaring for the past two years on the back of the eurozone debt crisis, precious metals like platinum and palladium have done much less well.

Though platinum is even rarer than gold, it is trading at around $150 per ounce less than the yellow metal, the biggest discount in 26 years.

"Platinum has underperformed gold recently," said Mike Mason of Sucden Financial. "At its highs it surpassed gold, but it's very much an industrial metal now and reliant on motor industry demand."

The very same factors which have helped gold to scale above $1,600 an ounce - the ongoing banking crisis, the sick global economy and worries about the security of traditional safe havens like government bonds - have driven the weakness in platinum, which is used in catalytic converters and electronics as well as jewellery.

On top of that, platinum and palladium, which are mainly produced in South Africa, are not only in good supply relative to demand, but that supply is coming in cheaper because of the fall in value of the South African rand relative to the dollar in which metals are priced.

More than 75% of platinum and 40% of palladium are mined in South Africa. Russia's Norilsk nickel mines produce another 44% of palladium, with the US and Canada producing most of the rest. There are four other important industrial minerals in the platinum group - iridium, osmium, rhodium and ruthenium - but they are niche products traded only by industrial specialists.

Is it different this time?

Contrarian investors who are optimistic about a resolution of the eurozone crisis - and with a strong stomach for risk - might be drawn to betting that the spread between gold and platinum will contract over the next six to nine months.

History is on their side. Every time since 1985 that platinum has dropped to parity, it has sharply bounced back above gold. However this current dip, which began in August, shows no sign of reversing yet.

"The eurozone crisis should be good for gold, but it is swinging investors back towards the dollar," Mason said. However, he pointed out that renewed focus on how bad US fiscal fundamentals are could easily derail recent dollar strength and send gold soaring again - to the detriment of a spread trade.

Investing in platinum

On the face of it there are many ways of investing in platinum.

  • Futures traded on the London Platinum and Palladium Market or on NYMEX in New York
  • Physical ownership of the metal, either through coins like the American Eagle, or in deposits in a Swiss bank account.
  • Through spread betting or contracts for differences on the price of the metal.
  • Owning shares in mining companies with substantial platinum assets or exposure.
  • Owning exchange traded funds based around platinum.
  • Traded options in platinum and palladium, only available in the US markets.

Each route has its own advantages and disadvantages. For a start, investors looking for exposure to palladium are going to be faced with far fewer possibilities, just futures, overseas traded options, or spread betting.

Futures and options

Neither futures nor options are suitable for the inexperienced investor. Futures are a contractual obligation to buy or sell at a fixed price in the future a fixed deliverable quantity of the metal in question, and the minimum contract size of 50 ounces, for platinum, means a substantial financial commitment when prices can move $100 in a day, or $5,000 per contract.

Options confer the right but not the obligation to make the deal at the price agreed, though net sellers of options can have obligations imposed upon them. Owning calls and puts can give options magnified gains, but the entire option cost can easily be lost on adverse price movements.

Physical ownership is costly even if conducted through a bank. Actual ownership incurs VAT, insurance and security costs, and is only suitable for the very wealthy.

Practical possibilities

For the smaller investor, there are really only three possibilities: mining shares, spread betting/CFDs and exchange traded funds.

For platinum, there is a limited universe of stocks. The biggest platinum miner is Anglo American Platinum. Other South African-focused firms include Anglo American, Impala Platinum, AIM-listed Jubilee Platinum and Northam Platinum. North America Palladium offers the only pure play on this metal.

We pick out five small cap miners to watch in: Penny prospectors: Worth a punt?

A key benefit is that many of these firms offers a dividend yield - a rare income for any commodity investment - but downsides include a whole series of extra exposures to currency swings, mining costs and other factors which can hit profits.

Spread bets on platinum are available, with modest spreads because the size of the bet can be controlled and stop-losses utilised. Used cautiously, this may be the best introduction to platinum and palladium trading.

For more on trading platinum, read Peter Temple's view in: Platinum anomaly could play for investors.

Finally, there are an increasingly broad array of exchange traded funds which target platinum, and one or two which go for palladium.

"ETFs may be the way for private investors to go, so long as they know what they are getting," Sucden's Mason said.

Choosing the right ETF isn't straightforward. Some merely replicate the returns of a group of relevant futures contracts, such as the E Tracs CMCI traded in New York (PTM). Others, such as ETF Securities London-listed ETFS Physical Platinum actually have an entitlement to the underlying metal which should remove one level of counter-party risk. As well as this distinction, investors need to keep a close eye on fees, which vary widely.

Looking for the lowdown on other sparkling investments? See what Interactive Investor's focus on precious metals has to offer.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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